Motherson Sumi continues to face margin pressure in foreign markets

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Global auto components maker Motherson Sumi Systems Ltd faced some hiccups in the March quarter, as costs rose along with adverse currency movements to erode profitability.

Although the Street had factored a small decline in Ebitda (earnings before interest, tax, depreciation and amortization), at 9.7% it came in 102 basis points lower than a year ago.

One basis point is one-hundredth of a percentage point.

Cost pressures were felt mainly on account of some issues in overseas operations. Ebit (earnings before interest and tax) margins at the European subsidiary, Samvardhana Motherson Peguform (SMP), dropped 50 basis points lower at 4.4%. This is because of Motherson Sumi’s policy to charge “start-up” costs of its new units at Hungary and Alabama that are yet to go on stream, which weighed on profitability.

That’s not all. At its most recent acquisition PKC, the margin was an unexpectedly wafer-thin 3.1%. According to brokerage firm Emkay Global Financial Services Ltd, this was due to challenges that PKC faced on material availability that led to higher freight and labour expenses, and dragged margins down.

It is not easy to skirt around such cost pressures. For instance, ramping up capacity at SMP’s new European units, which will churn out higher volumes to offset cost pressures, will take some time.

Besides, raw material costs are on the rise too. At a consolidated level, they jumped by 39% in absolute terms and by 100 basis points as a percentage to sales. Employee costs rose by 50 basis points.

Fortunately, with more than a two-thirds share in supplies to automobile original equipment manufacturers in India, the firm is on a strong wicket on home ground. High growth rates in auto sales have bolstered the drop in overall profitability to some extent.

Indeed, Motherson Sumi timed its acquisitions well over a decade when global markets were in turmoil. The strategy not only helped the Indian component maker scale up the content supplied per vehicle, but it also broke the hegemony of global suppliers such as Faurecia and Johnson Controls.

However, following this and given that these overseas entities account for 83% of consolidated revenue and nearly three-fourth of the profits, focus on margins is important to sustain rich valuations. With margins under pressure, Motherson Sumi’s stock valuation has started to erode. Meanwhile, net debt too has risen over a year, reflecting in the 35% year-on-year increase in interest costs during the March quarter.

Little wonder, therefore, that the stock closed around 5% lower on Thursday. At its current level of Rs301.65, it trades at a price-to-earnings multiple of 24 times one-year forward estimated earnings.livemint